Question

Q 2?Rafique Inc. makes product A and sells at selling price of SAR 45 per unit. Badr Inc. wants to buy 5,000 units at SAR 27 per unit. Rafique Inc. has a normal capacity of 101,000 units and projected sales to regular customers this year is 92,000 units. Per unit costs traceable to the product (based on normal capacity of 92,000 units) are listed below?

Direct Materials??8.1

Direct Labour?`??6.0

Variable Mfg. Overhead?6.2

Fixed mfg. overhead??4.8

Fixed administrative costs?0.8

Fixed Selling Costs??0.4

Does the quantitative analysis suggest that the company should accept the special order?

Q 1     Salem Corporation is producing product A. The company had problems related to quality. Customers have been returning the product in the last months.

?ABC costing method and ABM can be used to manage quality.

a.?Define each type of quality-related activity and give one example of each activity type.

b.?Suppose the managers implement an ABC system to measure the costs of quality. How could they use information from this system to improve the product?

s Q 3 Discuss the qualitative factors in Keep or Drop Decision in details.

Answer 1

Manufacturing industry in the developing countries has been grown significantly over the last decade due to increased public demand, Government's initiatives, and the investors increased interest in the manufacturing sector. Unfortunately, quality of product is still an important issue for the locally produced goods. Only a few manufacturers are producing high quality products with higher customer satisfaction. Many of them are holding quality certificates but a few has reached a stage of development where they are able to apply modern quality principles and techniques effectively. Research on product quality improvement shows that meeting customer satisfaction, increasing profits and reducing losses to a minimum level can be attained through the application of modern quality philosophies and principles such as Total Quality Management (TQM). Understanding the tools and techniques of TQM is considered to be significant in order to get useful results. A better understanding is required to investigate the current status of TQM implementation. This research article presents an investigation of current quality control practices and analyses the prospects and potential barriers in implementing the most modern quality technique and principles within the manufacturing industries in one of the rapidly developing countries

Activity-based costing (ABC) is an accounting method that identifies the activities that a firm performs and then assigns indirect costs to products. An activity-based costing (ABC) system recognizes the relationship between costs, activities and products, and through this relationship, it assigns indirect costs to products less arbitrarily than traditional methods.

Some costs are difficult to assign through this method of cost accounting. Indirect costs, such as management and office staff salaries are sometimes difficult to assign to a particular product produced. For this reason, this method has found its niche in the manufacturing sector.

Activity-based costing (ABC) is mostly used in the manufacturing industry since it enhances the reliability of cost data, hence producing nearly-true costs and better classifying the costs incurred by the company during its production process.

This costing system is used in target costing, product costing, product line profitability analysis, customer profitability analysis and service pricing. It is also hugely popular since organizations can develop a much better corporate focus and strategy if costs are better grasped.

Activity-based costing enhances the costing process in three ways. First, it expands the number of cost pools that can be used to assemble overhead costs. Instead of accumulating all costs in one companywide pool, it pools costs by activity. It also creates new bases for assigning overhead costs to items such that costs are allocated on the basis of the activities that generate costs instead of on volume measures such as machine hours or direct labor costs. Finally, ABC system alters the nature of several indirect costs, making costs previously considered indirect such as depreciation, inspection or power are traced to certain activities.

However, ABC transfers overhead costs from high-volume products to low-volume products, raising the unit cost of low-volume products.

The ABC system of cost accounting is based on activities, which is any event, unit of work or task with a specific goal — such as setting up machines for production, designing products, distributing finished goods or operating machines. Activities consume overhead resources and are considered cost objects.

Under the ABC system, an activity can also be considered as any transaction or event that is a cost driver. A cost driver, also known as an activity driver, is used to refer to an allocation base. Examples of cost drivers include machine setups, maintenance requests, power consumed, purchase orders, quality inspections or production orders.

There are two categories of activity measures: transaction drivers, which involves counting how many times an activity occurs, and duration drivers, which measure how long an activity takes to complete.

Unlike traditional cost measurement systems that depend on volume count such as machine hours and/or direct labor hours to allocate indirect or overhead costs to products, the ABC system classifies five broad levels of activity that are to a certain extent unrelated to how many units are produced. These levels include batch-level activity, unit-level activity, customer-level activity, organization-sustaining activity and product-level activity.

Identifying and using multiple cost drivers and performance measures to manage an activity is called activity-based management (ABM). Essentially, ABM expands the basic activity-based costing (ABC) model by separating the concept of product costing using activity-based relationships (Costs ? Activities ? Products) from the task of directly managing activities to achieve cost efficiencies and to enhance quality in business processes. Using ABM, opportunities for cost efficiencies are identified by separately tracking multiple cost drivers for each critical activity. Continuous improvement of the organization is then achieved using performance measures based on quality and timelines issues for strategically important activities in the organization. Hence, managing activity cost drivers and performance measures for a particular activity is a management task that is actually exclusive of the processes of tracking a single cost driver that allocates the activity's costs to products.

In cost accounting, qualitative factors don’t involve numbers and financial analysis. Call them “people” factors. Decisions based in part on qualitative factors are relevant, even though you can’t tie specific cost or revenue numbers to them. They can have a long-term impact on profitability, so you need to consider them. Qualitative factors should always be considered before making any business decisions.

The qualitative factor that has the biggest impact on your business may be employee morale. It’s really an issue when there’s bad news, such as a layoff. Layoffs, as a rule, don’t improve employee morale. Employees are uncertain about their futures, even if they’ve been told that their jobs are secure. They may be skeptical, saying, “Yeah, and if you believe that, I’ve got a bridge I want to sell you.”

On top of that, the remaining employees may have to take on the workload of people who were let go. The worst thing you can say to them is, “Work smarter, not harder.” Employees have a BS meter that’s always operating, and that statement is a 9.9 on a scale of 10.

There’s a rule that’s true far more often than not: When employee morale goes down, productivity goes down, too.

There’s another, bigger potential problem with layoffs: When you lay people off, some institutional knowledge leaves with them. Even the best operations manual can’t cover everything. If a company lays off a great sales representative, personal relationships with customers may suffer, too.

When other key people leave, those taking up their duties will make mistakes — that’s almost unavoidable. Those mistakes can cost the company business, if the company isn’t careful. In extreme situations, lost business (due to mistakes) costs more than the cost savings from the layoff.

You may not be able to trace the impact of a qualitative factor such as layoff effects to product costs, but you can allocate it. Doing so adds more lines to your decision-making analysis. It also requires you to make judicious estimates. For example, you might say, “I’m going to assume a 10 percent drop in productivity for three months.”

The remainder of the decision-making process is simple but requires some detail work. First, implement your decision. Then evaluate the outcome of your decision. The results will tell you if you decided wisely. If you’ve made a mistake, you must make new decisions about how to fix it.